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What can I hold in an ISA?

An ISA is a tax-efficient wrapper in which you can hold cash, investments or peer-to-peer lending products. This is what you need to know to help you choose the right ISA or combination of ISAs for you. 

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice. Tax rules can change in future. Their effects on you will depend on your individual circumstances.

What you’ll learn:

  • What you can and can’t hold in an ISA.
  • How ISAs can reduce your tax bills.
  • How ISAs are more flexible than ever before.

An ISA is essentially a tax-efficient wrapper in which you can hold cash, investments or peer-to-peer lending products.

Here, we explain what you need to know to help you choose the right ISA or combination of ISAs for you. Remember that tax rules can change in future and their effects on you will depend on your individual circumstances, which can also change.

Different types of ISA

This tax year, 2018-19, you can invest up to £20,000 in ISAs and one of the main advantages of ISAs is that you won’t pay income tax, tax on dividends or Capital Gains Tax (CGT) on any savings or investments you hold in them.

It’s worth noting, however, that if you invest outside an ISA, you won’t necessarily have to pay any tax, as longs as your dividends don’t exceed the dividend allowance, or any interest from cash, funds, gilts or bonds aren’t higher than the personal savings allowance.

Find out more about the personal savings allowance

Only profits made above the annual CGT allowance, which for the 2018-19 tax year is £11,700, will be subject to CGT at 10% or 20% depending on your tax band.

There are four different types of ISA to choose from:

  • Investment (stocks and shares) ISA
  • Cash ISA
  • Innovative finance ISA
  • Lifetime ISA1

You can either put your whole allowance into a cash, investment, or innovative finance ISA, or alternatively, you can split your allowance between these three types of ISAs and the lifetime ISA. However, with a lifetime ISA you can only pay in up to £4,000. If you don’t use your ISA allowance this tax year, you can’t roll it over to the following year.

Remember, the value of investments can fall as well as rise, and you could get back less than you invest. Tax rules can change in future. Their effects on you will depend on your individual circumstances.

Here’s what you can hold in each of the four different types of ISA. Remember that tax rules can change in future and their effects on you will depend on your individual circumstances.

Investment ISA

Here’s what you can hold in each of the four different types of ISA. Remember that tax rules can change in future and their effects on you will depend on your individual circumstances.

You don’t pay income tax, tax on dividends or capital gains tax on any returns from investments held with an Investment ISA. All types of funds – unit trusts, open-ended investment companies (OEICs), investment trusts, exchange traded funds (ETFs) – can be held in an investment ISA, as can government and corporate bonds. You can also buy individual shares, including those listed on the Alternative Investment Market (AIM) and NEX Exchange, and hold them in an investment ISA.

Find out more about our Investment ISA

If you want to, you can hold cash in an investment ISA too, and move it into investments once you’ve decided where to put your money.

The type of provider you hold your investment ISA with will depend on your requirements.

Some services, such as ours, don’t provide advice, so you make your own decisions about what you’ll hold in your investment ISA. These are often referred to as self-directed or execution-only services and they tend to offer the simplest and cheapest way to invest and are only for investors who are happy making their own investment choices.

If you aren’t comfortable going it alone, then you may want choose an advisory service, so that an adviser can recommend which investment to hold in your ISA. You’ll pay extra for this advice.

Don’t commit any money until you fully understand how your chosen investments work, what the potential returns could be and what level of risk comes with them. Remember too that investments can fall as well as rise and you could get back less than you put in.

Cash ISAs

Cash ISAs work in the same way as any other savings account, except that you don’t pay tax on any of the interest you earn.

Most cash ISAs allow you either to pay in a lump sum or to make regular contributions.

Returns from cash ISAs aren’t dependent on market movements as they are with investment ISAs. If there’s a sudden fall in share prices this won’t have any impact on the rate of interest you’re earning.

Cash ISAs aren’t totally risk-free however, as the interest you earn may not keep pace with inflation – the rising cost of living. This is one of the reasons many people look to invest some of their money in other asset classes, such as shares, as cash tends not to have the highest potential returns, though they have to accept the risk of losing their money when they do this.

Like normal savings accounts, there are different type of cash ISAs available, including instant access, regular savings and fixed-rate deals.

Instant access cash ISAs

Instant access ISAs enable you to get your hands on your cash whenever you want, which is useful if you aren’t sure when you might need to call upon your savings. Some providers put limits on minimum deposits made each year and on the maximum amount that can be withdrawn, so check what these are before opening an account. Rates of interest offered on instant access ISAs will be variable.

Fixed-rate cash ISAs

Fixed-rate ISAs pay you a fixed rate of interest for a set period of time. They don’t usually permit any withdrawals during the fixed term so if you’re considering this type of cash ISA, make sure you can afford to commit the money you put away. If you do need to call upon some or all of your savings before the term is up you may be charged a penalty, such as loss of interest.

Regular savings cash ISAs

Regular savings cash ISAs require you to pay in a certain amount each month for a fixed period of time. Deposits are limited to your ISA annual allowance and early withdrawals will usually incur a penalty.

Innovative finance ISAs

Innovative finance ISAs were launched in April 2016. They enable you to hold peer-to-peer (P2P) loans – where you’re effectively a lender and the money you invest is lent directly to borrowers via a peer-to-peer platform – within the tax-efficient ISA wrapper, so that interest on these loans is tax-free.

Innovative finance ISAs present special and higher risks including adverse tax consequences if a P2P loan isn’t repaid or if an operator becomes insolvent. There are similar adverse tax consequences in withdrawing or transferring such an agreement within the ISA and the procedures are complex. Furthermore, it may not be possible to sell the P2P agreements in an open market.

Unlike cash ISAs, innovative finance ISAs don’t enjoy the protection of the Financial Services Compensation Scheme.

Many lending platforms do however offer their own provision funds to offer protection to lenders in the event that borrowers default on their loans.

Lifetime ISAs

Lifetime ISAs were introduced in April 2017 as a new way to save, helping savers get on the property ladder for the first time or contribute towards their retirement savings. They can hold either only cash or cash and investments depending on the provider and the maximum amount you can pay in each tax year is £4,000.

Under the terms of the lifetime ISA scheme, the government will pay a 25% bonus on money paid into lifetime ISAs, equivalent of £1 for every £4 saved. The maximum investment that the government bonus will be paid on is £4,000 per year, meaning the 25% government top-up is worth up to £1,000 a year. The bonus is only paid until savers reach 50 years old and lifetime ISAs are able to be opened by people aged 18-39 years old.

ISA flexibility

ISAs are more flexible than they’ve ever been thanks to rule changes introduced in April 2016.

You can now withdraw money from your ISA and replace it in the same tax year, without this replacement counting towards your annual ISA limit for that year. You can do this with a cash ISA, investment ISA, or an innovative finance ISA as long as you have a cash holding within them to draw upon. Not all ISA providers may offer this flexibility, so check with yours before withdrawing any money.

You can also transfer your ISA holdings freely between all three types of ISA to suit what’s right for you depending on your appetite for risk or market conditions. For example, if you have a cash ISA and are prepared to risk loss of capital and don’t need to draw on your money for some years, then transferring to an investment ISA might allow you the chance to get a potentially better rate of return. Alternatively, if your appetite for risk has reduced, you may want to consider moving from an investment ISA to a cash ISA. Seek professional financial advice if you aren’t sure what the best course of action is.

The flexible ISA rules don't apply to the lifetime ISA. Withdrawals will forfeit the government bonus and face a 5% charge, unless they are being used for the intended purposes of the lifetime ISA. This includes withdrawing the money to fund the purchase of your first home worth under £450,000, or to put towards your retirement once you’re over 60 years old, or in you become terminally ill. Withdrawals made under these circumstances will be free of charge.

You can transfer from one ISA provider to another, but you must transfer your account rather than withdraw your money to open a new account. Remember, if you transfer money out of a lifetime ISA, you will forfeit the government bonus and face a 5% charge against the amount you transfer out, starting from the 2018-19 tax year. If you transfer cash from an existing ISA (excluding a Help to Buy ISA) into a lifetime ISA it will count towards your £4,000 lifetime ISA allowance for the year and qualify for the government bonus, but will not count towards your overall ISA allowance.

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